Please refer to Limited Brands Inc.’s financial statements above. Use the company’s operating profit as an approximation of its EBIT, and assume a 40% tax rate for your calculations. What percentage decline in earnings before interest and taxes could Limited Brands have sustained in fiscal years ending in January 2006 and 2007 before failing to cover: a. Interest and principal repayment requirements? b. Interest, principal, and common dividend payments? Solutions: a. For the fiscal year ending January 2006: Interest expense = $94 Principal repayment = $0 (long-term debt due in one year from 2005) EBIT = $947.5, so it could have fallen (947.5 - 94)/947.5 = 90.1% before failing to cover interest and principal. For the fiscal year ending January 2007: Interest expense = $102 Principal repayment = $7 (long-term debt due in one year from 2006) EBIT = $1,176, so it could have fallen (1,176 - 102 - 7/0.6)/1,176 = 90.3% before failing to cover interest and principal. b. For the fiscal year ending January 2006: Interest expense = $94 Principal repayment = $0 (long-term debt due in one year from 2005) Common dividends = Shares outstanding ×Dividends per share = 395 ×0.61 = $241.0 EBIT = $947.5, so it could have fallen (947.5 - 94 - 241/0.6)/947.5 = 47.7% before failing to cover interest, principal, and dividends. For the fiscal year ending January 2007: Interest expense = $102 Principal repayment = $7 (long-term debt due in one year from 2006) Common dividends = Shares outstanding ×Dividends per share = 398 ×0.60 = $238.8 EBIT = $1,176, so it could have fallen (1,176 - 102 - 245.8/0.6)/1,176 = 56.5% before failing to cover interest, principal, and dividends.